Ratios simplify financial and non-financial data into numbers that can be compared across industries and regions. They are used to form conclusions and create projections about the profitability, efficiency, and expected success of a business. Using these indicators the right way can help us to make good judgements about decisions that must be made. Ratios are an easy way to show us how a company is doing.

Some of the ratios we discuss are necessary for financial reporting under GAAP. Others are used heavily by banks and investors when making decisions about loans and investments.

Essential Ratios

The quick ratio is the most commonly-used measure of an entity's liquidity. It compares all current assets (except inventory) with all current liabilities. The quick ratio tells us if an entity has enough liquid assets (assets that can be reasonably converted to cash) to meet its current obligations.